China Railway Signal & Communication Corporation, the world’s largest railway control system developer by revenue, priced its Hong Kong initial public offering at the bottom of the range despite having the order book fully covered on day one of the roadshow.
With the final price settled at HK$6.3, the state-owned company stands to raise HK$11 billion ($1.42 billion) through the listing of 20% of its total outstanding share capital. Final valuation came at 19.0 times consensus 2015 earnings and 14.5 times 2016 forecast earnings.
With the institutional tranche covered by cornerstone and anchor investors across the price range, bookrunners could have priced the deal much higher. But the bottom-end pricing was meant to deliver a higher quality order book to the client, a banker on the deal said.
“It is not about price sensitivity,” the banker said. “The cornerstone and anchor investors came in with little price sensitivity, so there’s not much of a concern. At the very end of the day, what we care most [about] is to form a good mix of high quality investors to ensure healthy post-IPO performance.”
Approximately 70% of the deal was allocated to global long-only funds and corporates, while roughly 30% was taken up by hedge funds and asset managers. Chinese investors accounted for the majority of the book, although some international and US funds came in during the final hours of the bookbuild on Friday.
A total of 140 lines entered bids through the institutional tranche, with more than 100 accounts receiving allocations, according to the banker. The final order book was multiple-times covered at the bottom of the price range of HK$6.3-HK$8.0 per share.
Against a backdrop of market volatility, retail investors appear to have given China Railway Signal the cold shoulder, failing to take up the full 5% allocated for the retail tranche. With only 55% of the retail portion subscribed, approximately 34 million shares were reallocated to the institutional tranche.
During the week, the Shanghai Composite Index lost 10% and ended at 3,663 points on Friday. On Monday alone – the day China Railway Signal launched its global roadshow – the index plunged 8.5% in the biggest daily drop since 2007.
Hong Kong’s Hang Seng Index dropped 3% on Monday, but was able to recover some of the losses as the US Federal Reserve reaffirmed its intention to move cautiously on interest rates in a statement on Wednesday. The Index ended the week with a 2% loss.
Chinese investors are playing an increasing important role in Hong Kong IPOs. China Railway Signal’s 16 cornerstone investors, all mainland asset managers and corporates, took up 56% of the total deal.
“It is not the investment return that matters. It is about how much they can invest,” according to another Hong Kong-based ECM banker not involved in the deal.
With coffers full and low interest rates ensuring ready access to cheap money, Chinese institutional and corporate investors need to deploy capital to meet investment targets set by senior management.
With the suspension of mainland IPOs, Chinese capital is keener than ever to participate in Hong Kong listings.
China Railway Signal's $1.42 billion float will be the fourth largest IPO on the Hong Kong bourse this year, coming in behind Legend Holdings' $2 billion IPO in June. Huatai Securities was the largest Hong Kong initial offering on $5 billion in May, followed by GF Securities $4.1 billion listing in March, according to data provider Dealogic.
The railway equipment maker stands to be the largest Hong Kong listing by a Chinese state-owned enterprise since Sinopec Engineering Group’s $1.8 billion offering in 2013.
China Railway Signal will begin trading August 7.
Citigroup, Morgan Stanley and UBS are joint global coordinators of the China Railway Signal IPO. BOC International, China Merchant Securities, Goldman Sachs, Haitong Securities and Macquarie are joint bookrunners.